the four main tasks in crafting corporate strategy
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The Four Main Tasks in Crafting Corporate Strategy. Make moves to enter new businesses Initiate actions to boost combined performance of businesses Find ways to capture synergy among related business units - PowerPoint PPT PresentationTRANSCRIPT
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© The McGraw-Hill Companies, Inc., 1998
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The Four Main Tasks in CraftingCorporate Strategy
Make moves to enter new businesses Initiate actions to boost combined
performance of businesses Find ways to capture synergy among
related business units Establish investment priorities, steering
resources into most attractive business units
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When to Diversify?
When it makes sense to diversify depends on Growth potential in present business Attractiveness of opportunities to
transfer existing competencies to new businesses
Potential cost-saving opportunities to be realized by entering related businesses
Availability of adequate financial and organizational resources
Managerial expertise to cope with complexity of operating a multi-business enterprise
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Why Diversify?
To build shareholder value
Make 2 + 2 = 5
Diversification is capable of increasing shareholder value if it passes three tests:
1. Attractiveness Test
2. Cost of Entry Test
3. Better-Off Test
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Corporate Strategy Alternatives
Vertical Integration
Single Business
Concentration
Diversify into Related Businesses
Diversify into
Unrelated Businesses
Diversify into Related & Unrelated Businesses
Make new acquisitions
Divest weak units
Restructure portfolio
Retrench
Become a DMNC
Liquidate
Post-Diversification
Strategic Alternatives
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Acquire a Company Already in the Target Industry
Most popular approach to diversification Advantages
Quicker entry into target market Easier to hurdle certain entry barriers
Technological inexperience Gaining access to reliable suppliers Being of a size to match rivals in terms
of efficiency and costs Getting adequate distribution access
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Diversification via Internal Startup
More attractive whenMore attractive when Ample time exists to create a new business
from ground up Incumbents slow in responding to new entry Less expensive than acquiring an existing firm Company already has most of needed skills Additional capacity will not adversely impact
supply-demand balance in industry New start-up does not have to go head-to-head
against powerful rivals
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Diversification via Joint Ventures
Good way to diversify whenGood way to diversify when Uneconomical or risky to go it alone Pooling competencies of two partners
provides more competitive strength Foreign partners are needed to surmount
Import quotas Tariffs Nationalistic political interests Cultural roadblocks
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Drawbacks of Joint Ventures
Raises questions Which partner will do what Who has effective control
Potential conflicts Control over strategy and long-term
direction How operations will be conducted Control over cash flows and profits Personalities and cultures of partners
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Related Diversificationand Strategic Fit
Types of strategic fit Shared technology Similar operating methods Common labor skills Common distribution channels Common suppliers and raw materials sources Similar kinds of managerial know-how Ability to share common sales force Customer overlap Any area where meaningful sharing
opportunities exist in businesses’ value chains
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Related Diversificationand Competitive Advantage
Competitive advantage can result from related diversification if opportunities exist to Transfer expertise/capabilities/technology Combine related activities into a single
operation and reduce costs Leverage use of firm’s brand
name reputation Conduct related value chain activities in a
collaborative fashion to create valuable competitive capabilities
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Common Approaches toRelated Diversification
Sharing of sales force, advertising, or distribution activities
Exploiting closely related technologies Transferring know-how and expertise from
one business to another Transferring brand name and reputation to a
new product/service Acquiring new businesses to uniquely help
firm’s position in existing businesses
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Concept: Economies of Scope
Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella
Exist when it is less costly for two or more businesses to operate under centralized management than to function independently
Cost saving opportunities can stem from interrelationships anywhere along businesses’ value chains
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Concept: Strategic Fit
Exists among different businesses when their value chains are sufficiently similar to offer opportunities
Offers competitive advantage potential of Lower costs Efficient transfer of
Key skills Technological expertise Managerial know-how
Use of a common brand name
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Technology Fits
Offer potential for sharing common technology or transferring technological know-how
Potential benefits Cost-savings in technology development
and new product R&D Shorter times in getting new
product to market Interdependence between
resulting products leads to increased sales Technology-transfer allows more efficient
performance of value chain activities
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Operating Fits
Offer potential for activity sharing or skills transfer Procuring materials Conducting R&D Improving production processes Manufacturing components Assembling finished goods Performing administrative support
functions
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Potential Benefits of Operating Fits
Cost savings
Tapping into more scale economies and/or economies of scope
Increased operating efficiency
Most important skills transfer opportunities
If supply chain management or manufacturing expertise can benefit another business
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Distribution andCustomer-Related Fits
Arise when value chains of different businesses overlap so products are
Used by same customers
Distributed through common dealers and retailers
Marketed or promoted in similar ways
Sold under a common brand name
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Potential Benefits of Distributionand Customer-Related Fits
Single sales force for related products Advertising related products together Use of common brand name Joint delivery and shipping Combining after-sale service and repair work Joint order processing and billing Joint promotional tie-ins
Cents-off couponing, trial offers, specials Combining dealer networks
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Managerial Fits
Emerge when different business units require comparable types of
Entrepreneurial know-how
Administrative know-how
Operating know-how
Allow accumulated managerial know-how in one business to be useful in managing another business
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Involves diversifying into businesses with
No strategic fit
No meaningful value chainrelationships
No unifying strategic theme
Approach is to venture into “any business in which we think we can make a profit”
Firms pursuing unrelated diversification are often referred to as conglomerates
What Is Unrelated Diversification?
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Acquisition Criteria For Unrelated Diversification Strategies
Can business meet corporate targets for profitability and ROI?
Will business require substantial infusions of capital?
Is business in an industry with growth potential? Is business big enough to contribute to the parent
firm’s bottom line? Is there potential for union difficulties or adverse
government regulations? Is industry vulnerable to recession, inflation, high
interest rates, or shifts in government policy?
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Attractive Acquisition Targets
Companies with undervalued assets
Capital gains may be realized
Companies in financial distress
May be purchased at bargain prices and turned around
Companies with bright prospects but limited capital
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Diversification and Shareholder Value
RELATED DIVERSIFICATION
A strategy-driven approach to creating shareholder value
UNRELATED DIVERSIFICATION
A finance-driven approach to creating shareholder value
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Divestiture andLiquidation Strategies
Situations occur when a subsidiary has to be sold or shut down
Misfits cannot be completely avoided
Unfavorable changes in industry attractiveness
Sub-par performance of a subsidiary
Diversification may lack compatibility of values essential to cultural fit
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Divestiture and LiquidationStrategy Options
Two types of divestiture options
Spin it off as independent company
Sell it
Liquidation
Most painful option
Involves terminating firm’s existence
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Competitive Advantage Avenues for a DMNC via Related Diversification
Transfer of expertise in a core technology to other businesses
Collaborative and strategically coordinated R&D benefiting all the related businesses
Ability to use same distributors and retail dealers on a worldwide basis
Ability to leverage an established brand name Use financial and organizational resources to
cross-subsidize a competitive assault against rivals